By now, most investors have probably heard of cryptocurrencies. Cryptocurrencies are ubiquitous in news headlines as an asset to invest in for the future. The hoopla surrounding cryptocurrencies makes it difficult for investors to differentiate between investments and to know which cryptocurrencies to invest in.
Like any new investment, there will be survivors and those who fail. Investors in the dotcom era probably remember all the search engine startups and many that no longer exist. So, which cryptocurrencies should you invest in and which should you avoid? First, we will discuss what a cryptocurrency is and its risks.
What is cryptocurrency?
Cryptocurrencies are digital money or virtual currency. It is a digital asset stored on a network of distributed computers. The computers use cryptography and encryption to make and verify transactions between people and institutions.
Cryptocurrencies use blockchain technology to record and verify transactions on a distributed ledger. It can be thought of as a shared public distributed database. The decentralized feature means that transactions are permanent and irreversible. Each different cryptocurrency has its own distributed ledger.
The critical point is that cryptocurrencies are not controlled by a single entity such as a government or a reserve bank. For example, the US Federal Reserve oversees the ability to print more US dollars.
Cryptocurrencies can be mined using a network of computers to solve complex math problems to create digital money. They can also be bought on an exchange from a broker or other investor.
Risk of investing in cryptocurrencies
Like any investable asset, risks exist for an investor. In the beginning, cryptocurrencies had a reputation for being used in criminal activities. However, they are now becoming more mainstream, with banks, large corporations, governments and the wealthy investing in or standing behind cryptocurrencies. This fact has made the asset class more credible. However, there is still high volatility and risk of hacking.
Volatility is the movement in the price of a tradable asset. Cryptocurrencies, such as Bitcoin, are volatile. For example, the price of Bitcoin has fluctuated between a low of ~$29,800 to a high of about ~$67,600. In addition, the price has been impacted by rising interest rates, restrictions from some governments and positive or negative statements from some prominent investors.
Another risk is hacking. Blockchain is reportedly difficult to hack because it is decentralized. However, hackers have successfully stolen cryptocurrencies from wallets and exchanges. For example, on March 30, 2022, $614 million was stolen from the Ronin network. The private keys were reportedly stolen and used to steal Ethereum and USDC. There have been eight other published hacks in the tens to hundreds of millions of dollars.
Next, cryptocurrencies are difficult to use in real trading. Very few retail transactions take place using digital currencies. Finally, unlike stocks, ETFs, bonds, gold and cash, cryptocurrencies are not well regulated.
3 cryptocurrencies to invest in
Bitcoin is the preeminent cryptocurrency and the oldest. The cryptocurrency was reportedly created in 2009 by Satoshi Nakamoto. However, no one has stepped forward and claimed to be this person. He mined the first Bitcoin and published the first magazine article about it. Some people think that Satoshi Nakamoto is a pseudonym for a group of programmers. Elon Musk thinks it’s the pseudonym for Nick Szabo.
In any case, Bitcoin has the longest track record and the largest market share of digital currencies. However, Bitcoin’s dominance has declined and now has about 40% of the total market share due to the proliferation of other cryptocurrencies. According to CoinDesk, one bitcoin is currently worth $41,284.90. There are 19.1 million Bitcoins in circulation, making the total market capitalization over $780 billion. The limit on the number of Bitcoins is 21 million.
In addition to its popularity with retail investors, Bitcoin is widely accepted by financial institutions and technology companies. As a result, some major tech companies keep Bitcoin on their balance sheets. For example, Tesla (TSLA) owns 43,000 Bitcoins worth about $2 billion. Other companies that own Bitcoin include Square (SQ), Mercade Libra (MELI), Coinbase (COIN), and Microstrategy (MSTR).
The value of Bitcoin is seen as gold. It is seen as a store of value because investors think it has value, much like a fiat currency. The reasons are that Bitcoin is limited in number, cannot be copied, traded, and stored and moved in a digital wallet. Furthermore, retail transactions do not take place in Bitcoin, just like gold.
In addition, Bitcoin does not appear to be correlated with cash and bonds and is seen as a hedge for inflation. However, it is correlated with growth stocks. Bitcoin has no underlying asset to back it up and pays no dividends or interest, so it has no inherent value. This fact causes higher volatility.
The second cryptocurrency on this list is Ethereum, not really a cryptocurrency. Ether (ETH) is the actual cryptocurrency that underlies Ethereum. The blockchain technology platform that powers ether is Ethereum. In any case, Ethereum is now often referred to as a cryptocurrency, but there is a distinction between it and ether. Vitalik Buterin conceived the concept of Ethereum in 2013 and the platform was launched in 2015.
Ethereum is the second most common cryptocurrency to invest in, with a market share of around 19.5%. While Ethereum is a cryptocurrency, it is not the same as Bitcoin and targets a different market niche. The Ethereum platform works through decentralized apps called dApps. Developers are making apps for buying, selling and using ether or other cryptocurrencies easier. The apps are powered by Smart Contracts, which are programs. Apps can send money, borrow money, perform peer-to-peer lending, etc.
An important distinction between Bitcoin and Ethereum is that the latter makes it possible to create entirely new cryptocurrencies within the platform, known as tokens. Examples are Chainlink and XRP. In addition, Ethereum allows the sale of digital art using non-fungible tokens (NFTs).
Since Ethereum is an open-source blockchain platform, it has attracted companies such as Microsoft (MSFT) and Advanced Micro Devices (AMD) to expand and build the platform. According to CoinDesk, one Ethereum is worth $3,123.46 at the time of writing.
There are approximately 119 million Ethereums in circulation and with that, the total market cap is over $370 billion. Unlike Bitcoin, the number of Ethereum is potentially unlimited.
The all-time high for Ethereum was $4,865.57 and its 52-week low was $1,701.10. The value of Ethereum is derived from its use as the default cryptocurrency or token of the Ethereum platform. Developers and users need ether to pay the transaction processing fees. Despite having intrinsic value, Ethereum is volatile.
3. USD Coin
The volatility of most cryptocurrencies leads us to the next one to invest in, USD Coin (USDC). USD Coin is trying to solve one of the shortcomings of most cryptocurrencies, their volatility. It is a type of cryptocurrency known as stablecoins. The token does this by trying to maintain a peg of one USDC down to $1.00. USD Coin was announced and launched in 2018 based on Ethereum. It is operated by Centre, a consortium that includes Circle and Coinbase (COIN).
USD Coin maintains its 1-to-1 peg to the US dollar by holding US Treasury bond reserves in US financial institutions. The amount of funds is confirmed but not checked monthly by the accounting firm Grant Thornton LLP.
USD Coin is the fifth largest cryptocurrency to invest in, with a market share of around 2.64%. USD Coin is targeting a different market niche than Bitcoin or Ethereum. For example, USD Coin is used for trading or executing transactions in other cryptocurrencies and allows the tokens to be exchanged for USD.
The USDC token is compatible with many blockchain technologies and thus is used on Ethereum, Algorand, Solana, Stella, TRON and Hedera. Therefore, an investor can exchange US dollars for USDC tokens and use them on an exchange, app or service. In addition, the process is reversible so that an investor can go back to USD.
According to CoinDesk, one USDC is worth $1.00 at the time of writing. The total market cap is over $50 billion. The amount of USDC is potentially unlimited, but must be backed by USD reserves. Despite the 1-to-1 pairing, the price fluctuates for short periods. For example, the all-time high for USDC was $1.19 and the 52-week low was $0.984947.
The value of the USDC tokens is the ability to exchange to and from US dollars and other cryptocurrencies. It is backed by US reserves with the peg and thus has low price volatility and can act as a hedge against inflation. In addition, USDC tokens can transfer funds or gain exposure to USD.
USDC has attracted investments from BlackRock (BLK), Fidelity Investments and other investment firms that make the token more credible.
Final thoughts on cryptocurrencies to invest in
Cryptocurrencies are an alternative asset class. Investors looking for diversification should consider crypto. However, they are often risky and volatile in many cases. In addition, not all cryptocurrencies are created equal, and today there are thousands that make selection more difficult.
We’ve listed three of the most common in different market niches. Remember that cryptocurrencies are not regulated and you can lose money.
Disclaimer: The author is not a licensed or registered investment advisor or broker/dealer. He does not give you individual investment advice. Consult a licensed investment professional before investing your money.
This article originally appeared on Wealth of Geeks.
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